Many people opt to invest in the stock market to achieve their long-term financial goals because it can yield a remarkable profit; however, for novice investors, the process may appear daunting and frightening.
Fortunately, there are various options that are regarded as the top investments for beginners, which are suitable for different objectives, financial capacities, and risk tolerances. This guide will address the most prevalent choices; however, seeking guidance from a financial advisor can assist in determining the most suitable options and offer assistance throughout the initial investment process.
Best investments to get started
1. High-yield savings account (HYSA)
If you are seeking higher returns on your money but feel hesitant about investing, you can opt for opening a high-yield savings account. With a much higher annual percentage yield (APY) compared to a regular savings account, an HYSA allows you to maximize your money’s return without the potential risks associated with investments.
When searching for an HYSA, it is advisable to compare options. Various financial institutions, including CIT Accelerated Savings, provide different APYs, however, the account with the highest APY may not always be the optimal choice. Carefully read the terms of each HYSA under consideration, paying attention to details about minimum balances or annual fees, in order to locate the best HYSA.
2. 401(k)
A significant number of employers in the United States include a 401(k) retirement plan as a component of their employee benefits package. Through this plan, a designated portion of your salary will be withheld as a contribution, which can be either pre-tax or post-tax, depending on the specific account type.
Contributing to a traditional 401(k) will lower your taxable income, but you’ll be required to pay taxes when you withdraw funds in retirement. On the other hand, opting for a Roth 401(k) means paying taxes on your contributions beforehand, and you won’t owe any taxes on your money when you retire.
If you earn $50,000 and your employer matches the first 6 percent of your salary, the employer will contribute $3,000 annually as long as you contribute at least that amount. Additionally, for the 2023 tax year, the maximum amount you can contribute as an employee is $22,500.
If you are self-employed or if your employer does not provide a 401(k) plan, consider exploring the following alternatives.
- Traditional or Roth IRA
- SEP IRA
- Simple IRA or Simple 401(k)
- Solo 401(k)
3. Short-term certificates of deposit (CD)
A certificate of deposit is a savings account that provides a higher APY compared to a conventional savings account. When you open a CD, you deposit a lump sum of money for a specified period. Throughout this term, you are unable to withdraw the funds without incurring a penalty. Upon reaching maturity, you have the option to either withdraw or roll over the funds into a new CD.
CD terms can vary from 6 months to 5 years, with longer-term CDs generally offering a higher APY. However, there are also short-term no penalty CDs available, such as CIT’s 11-month no penalty CD. It is worth noting that CDs provided by federally insured banks are protected up to $250,000 per customer.
4. Money market accounts (MMA)
An alternative with low risk is a money market account, which is another form of savings account offering a higher APY compared to a traditional account. Money market accounts, or MMAs, provide supplementary advantages like the ability to use a debit card or write checks, allowing convenient access to the funds when required.
U.S. Bank provides a money market account option that is both competitive and allows for convenient access to funds using a debit card or check-writing features. This account also offers a higher Annual Percentage Yield (APY) compared to a conventional savings account, making it an ideal choice for low-risk saving.
5. Emergency fund
A considerable number of Americans do not save money for emergencies, which puts them at risk of facing financial challenges.
If you find yourself in this situation, it is advisable to begin one now. By doing so, in the event of unforeseen circumstances like unemployment or vehicle repairs, having an emergency fund will provide some monetary security until you regain stability.
Establishing an emergency fund is advisable before investing in the market, as it can provide support in situations like leaving a toxic job, making sudden visits to grandparents, or facing unforeseen medical problems. This way, unexpected events will not disrupt your regular budget.
Emergency funds offer remarkable peace of mind. Financial stress due to unexpected expenses like repairs or medical bills is alleviated when one has an emergency fund. In simple terms, having an emergency fund significantly reduces tension and anxiety in daily life, something everyone desires.
6. Checking account
If you have cash, it is advisable to keep it in a checking account instead of storing it beneath your mattress. Similarly, just as credit bureaus monitor your credit activities, an entity known as ChexSystems tracks your handling of checking accounts.
Putting your money in a bank account is a great method to build a track record with the bank due to its benefits such as a debit card, access to loans, and financial education, although most checking accounts do not offer competitive interest rates.
7. Brokerage account
A bank account known as a brokerage account is utilized for purchasing and selling various investments, such as stocks, bonds, mutual funds, exchange-traded funds (ETFs), and more. Opening a brokerage account is a simple process as online brokers provide stock trading apps and platforms.
Traditional brokerage firms involve working with an individual broker who handles trades for you. When they execute a transaction (buying or selling), they usually impose commissions and fees, making it crucial to choose a firm with affordable trading costs.
By utilizing a cost-effective brokerage firm such as Plynk, you have the opportunity to lessen the expenses related to transactions. Plynk is considered one of the top investment apps for newcomers and grants entry to economical funds with minimal fees. Consequently, this enables you to accumulate savings of several thousand dollars in fees over the course of your life.
Additionally, there are alternative micro-investing apps that offer the opportunity to purchase investments. It is important to remain cautious of fees associated with the use of these investing apps. While they simplify the investment process, it is common for them to come with a cost.
To ensure that you are on the right path to build wealth in the future, it is equally essential for an investor to comprehend not only their investments but also the fees associated with them.
What should you consider as a new investor?
As a newcomer to the world of investments, it is advisable for you to take into account a few of these factors.
1. Financial goals
Although we all desire to increase our wealth, it is crucial to establish precise financial objectives. Take note of your net worth aspirations for the present, five years from now, fifteen years from now, and beyond. Afterward, analyze the necessary investments and the level of returns required to attain these goals.
2. Time horizon
When considering your financial goals, it is important to think about both the desired time of retirement and the desired time to achieve a financial freedom number. The timeframe for meeting your investment goals is just as crucial as the amount of money you aspire to have in the future.
3. Risk tolerance
To begin your journey as an investor, it is crucial to assess your risk tolerance. The appropriate investment combination will vary based on your ability to handle market fluctuations and the desired rate of return you aim to accomplish in the long run.
The risk level of your investments heavily depends on essential factors such as your age, family situation, place of residence, whether this is your primary or sole income source, and your net worth.
Starting with very little money, beginner investors can generally afford to take on a bit more risk compared to older investors. It should be noted, however, that no single answer can be applied universally since individual investment goals and risk tolerance vary from person to person.
4. Diversification
Diversification is an approach that can enhance your investment returns while simultaneously mitigating risk. The concept behind diversification is to minimize unpredictability by allocating investments across various types of assets, rather than solely focusing on one or two.
Some individuals opt for a diverse investment portfolio, while others prefer utilizing investment apps along with robo advisors or online brokers. A diverse portfolio may comprise investments in stocks, real estate, an employer-sponsored retirement plan, and even cash savings.
If you are unsure about the level of diversification of your investments or if you are concerned about your retirement savings plan, seeking advice from a financial advisor is always a viable option.
5. Automated vs. manual
Automated investing refers to the process of setting up automatic transfers and investments. Generally, individuals who opt for automatic investing continue to invest on a monthly basis, regardless of market conditions. This approach proves to be highly efficient as it allows for consistent investments over time, unaffected by emotions or financial news.
Making a decision between automated and manual investing is a personal choice influenced by your comfort level and long-term aspirations for financial independence. Manual investing entails actively monitoring the financial market and making smart investments in line with your objectives and market conditions, either by you or your financial advisors.
6. Taxes
When it comes to investing, there are numerous tax considerations to keep in mind. It is important to note that your investment income may be subject to taxation. Additionally, depending on the type of investment account you choose to open, there may be tax-advantaged accounts and other tax benefits available.
If you have any questions regarding investing and taxes, it is advised to seek guidance from a tax professional in order to ensure that your investments are optimized for tax purposes.
7. Consider minimum amounts
When choosing an investment vehicle, the minimum investment amount will vary. Thankfully, with certain brokerages, you can begin investing in stocks even with a small sum of money, possibly as low as $10. As part of your research, inquire about the minimum investment amounts to ensure that the option you select does not necessitate you to deposit a larger sum than you are comfortable with.
